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LKQ Corp. v. FCA U.S. LLC

United States District Court, D. Delaware

September 10, 2019

LKQ CORPORATION and KEYSTONE AUTOMOTIVE INDUSTRIES, INC., Plaintiff,
v.
FCA U.S. LLC, Defendants.

          REPORT AND RECOMMENDATION

          SHERRY R. FALLON, UNITED STATES MAGISTRATE JUDGE

         I. INTRODUCTION

         Presently before the court in this trademark infringement action is defendant FCA U.S. LLC's[1] ("FCA" or "defendant") motion for partial dismissal[2] for failure to state a claim upon which relief can be granted, or, in the alternative, bifurcation and stay of certain counts.[3] (D.I. 15) Plaintiffs, LKQ Corporation and Keystone Automotive Industries, Inc. (collectively, "LKQ" or "plaintiffs"), oppose the motion. (D.I. 22) For the following reasons, I recommend that the court DENY FCA's motion to dismiss Counts II, III, IX, X, XI, XIV, and XV, and GRANT FCA's motion to bifurcate and stay Counts IX, X, and XI.[4]

         II. BACKGROUND[5]

         LKQ Corporation imports aftermarket automotive replacement grilles ("Replacement Grilles") to restore damaged vehicles to their original condition and appearance. (D.I. 2 at ¶¶ 59-60, 83) Keystone Automotive Industries, Inc. is a wholly owned subsidiary of LKQ. (Id. at ¶ 58) LKQ sells many of its Replacement Grilles under its own "REPLACE" trademark, with packaging indicating that the parts are aftermarket parts. (Id. at ¶ 66)

         In 2014, LKQ entered into a design patent license agreement ("DPLA") with FCA, the Original Equipment Manufacturer ("OEM") of the vehicles requiring Replacement Grilles. (Id. at ¶¶ 5, 7, 44) The DPLA granted LKQ a license to the entirety of FCA's design patent portfolio. (Id. at ¶¶ 7, 96) Since early 2017, LKQ has paid FCA over $5 million in royalties pursuant to the DPLA. (Id. at ¶ 9) In addition to its design patents, FCA owns twelve trademark registrations covering automotive grille designs, and one trademark for a Chrysler logo design (the "FCA Marks"), [6] which form the basis of FCA's accusations of trademark infringement. (Id. at ¶¶ 5, 8; Ex. A) The complaint alleges that LKQ has an implied license to use the FCA Marks in accordance with the DPLA. (Id. at ¶ 98)

         In a March 27, 2017 email to United States Custom and Border Protection ("CBP"), FCA identified LKQ's Replacement Grilles as counterfeit and stated that it "desires prosecution of this matter." (Id. at ¶ 16; Ex. D) On more than 180 occasions thereafter, CBP has detained, seized, and threatened forfeiture of LKQ's Replacement Grilles at several U.S. entry ports on the basis that the products infringed the FCA Marks.[7] (Id. at ¶¶ 3-4, 10, 12) On July 12, 2017, LKQ provided CBP with the DPLA after FCA permitted the disclosure. (Id. at ¶ 21) In emails to CBP in May 2017, FCA authorized some of LKQ's imports, but indicated that the DPLA served only as a license to individual part numbers identified at FCA's discretion. (Id. at ¶¶ 18-19, 30; Ex. E)

         LKQ brought various claims against the United States government in the District of Delaware and the District of Columbia on February 7, 2018 and June 29, 2018, respectively, to force the government to initiate the necessary forfeiture actions in a timely fashion. (Id. at ¶¶ 25, 28, 30, 32-34; Ex. H) In response, the government instituted forfeiture actions on August 17, 2018 in Georgia and California resulting from seizures at ports in those states. (Id. at ¶¶ 34-35)

         LKQ filed this action on January 9, 2019, seeking a declaratory judgment as to the intellectual property, antitrust and Racketeer Influenced and Corrupt Organizations Act ("RICO") claims, and asserting a cause of action for breach of contract as to FCA's violations of the DPLA. (D.I. 2) On April 1, 2019, FCA filed a motion for partial dismissal for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). (D.I. 15) In its motion, FCA moves to dismiss the following causes of action: Count II - Unenforceability of trademarks against LKQ due to functionality; Count III - Unenforceability of trademarks against LKQ due to the right of repair; Count IX - Conducting an enterprise in violation of 18 U.S.C. § 1962(c) (RICO); Count X - Antitrust violation of Sherman Act Section 1 for trademark misuse; Count XI - Antitrust violation of Sherman Act Section 2 for the knowing assertion of unenforceable trademarks; Count XIV - Breach of covenant of duty of good faith and fair dealing; and Count XV - Unjust enrichment. (D.I. 16 at 4-15) Alternatively, to the extent the court does not dismiss Counts IX, X, and XI, FCA moves to bifurcate and stay those claims pending resolution of LKQ's trademark and contract claims. (Id. at 16-17)

         III. LEGAL STANDARD

         Rule 12(b)(6) permits a party to move to dismiss a complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). When considering a Rule 12(b)(6) motion to dismiss, the court must accept as true all factual allegations in the complaint and view them in the light most favorable to the plaintiff. See Umland v. Planco Fin. Servs., Inc., 542 F.3d 59, 64 (3d Cir. 2008).

         To state a claim upon which relief can be granted pursuant to Rule 12(b)(6), a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Although detailed factual allegations are not required, the complaint must set forth sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." Bell Atl Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). A claim is facially plausible when the factual allegations allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Iqbal, 556 U.S. at 663; Twombly, 550 U.S. at 555-56.

         The court's determination is not whether the non-moving party "will ultimately prevail," but whether that party is "entitled to offer evidence to support the claims." United States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 302 (3d Cir. 2011). This "does not impose a probability requirement at the pleading stage," but instead "simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of [the necessary element]." Phillips v. Cty. of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (quoting Twombly, 550 U.S. at 556). The court's analysis is a context-specific task requiring the court "to draw on its judicial experience and common sense." Iqbal, 556 U.S. 663-64.

         IV. ANALYSIS

         A. Count II: Pleading Trademark[8] Unenforceability Due to Functionality[9]

         A product feature that is functional cannot serve as a trademark. See TrafFix Devices, Inc. v. Mktg. Displays, Inc., 532 U.S. 23, 32 (2001); see also 15 U.S.C. § 1115(b)(8). "A registered trade dress is presumed to be non-functional unless the alleged infringer demonstrates that it is functional." Sweet Street Desserts, Inc. v. Chudleigh's Ltd., 69 F.Supp.3d 530 (E.D. Pa. 2014), aff'd, 655 Fed.Appx. 103, 109 (3d Cir. 2016); see also 15 U.S.C. § 1115. To determine whether a product feature is functional, the Supreme Court considers two tests: (1) whether the product feature "is essential to the use or purpose of the article or if it affects the cost or quality of the article," or (2) whether "the 'exclusive use of [the product feature] would put competitors at a significant non-reputation-related disadvantage.'" TrafFix Devices, Inc. v. Mktg. Displays, Inc., 532 U.S. 23, 32 (2001) (quoting Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159, 165 (1995)). If the court determines that the design is functional under the first test, "there is no need to proceed further to consider if there is a competitive necessity for the feature." Id.; see also Sweet Street Desserts, 69 F.Supp.3d at 543.

         1. Essentiality

         Under the first TrafFix test, FCA contends that Count II of LKQ's complaint should be dismissed because the functionality doctrine does not apply where, as here, LKQ alleges that the FCA Marks are functional when LKQ uses them in its Replacement Grilles, but LKQ does not challenge the validity of the FCA Marks themselves.[10] (D.I. 16 at 5) FCA argues that the complaint contains no allegation that the FCA Marks are essential to the use or purpose of FCA's automotive grilles, and instead alleges that the FCA Marks are essential to the use or purpose of LKQ's infringing grilles. (D.I. 25 at 3)

         In response, LKQ alleges that the shape and features of the Replacement Grilles are functional because they are essential to the use and purpose of the Replacement Grilles as replacement parts. (D.I. 22 at 4-5) According to LKQ, functionality is not only an issue at the registration stage, and it may be asserted as a defense at any time, even absent a claim that the FCA Marks are invalid. (Id. at 5) LKQ alleges that FCA is barred from arguing otherwise due to the res judicata or collateral estoppel effect of the Central District of California's decision on remand in Chrysler Corp. v. Vanzant, 44 F.Supp.2d 1062 (CD. Cal. 1999).[11] (Id. at 6; 7/30/19 Tr. at 14:7-16:6)

         LKQ's complaint lacks sufficient factual matter to suggest that the FCA Marks are functional under the first TrafFix test. The complaint alleges that "the design of a replacement part is essential to the use or purpose of the replacement part," in part because "insurance repairs are typically required, both contractually and legally, to restore a car to its original appearance." (D.I. 2 at ¶¶ 88, 91) Product features, such as grille designs, are functional if they are "essential to the use or purpose of the article." TrafFix, 532 U.S. at 32. The relevant inquiry in this case is whether the FCA Marks are essential to the use or purpose of the FCA grilles, because the functionality doctrine does not apply to circumstances in which the plaintiffs mark makes a defendant's product more useful. See Rosetta Stone Ltd. v. Google, Inc., 676 F.3d 144, 161 (4th Cir. 2012) ("Once it is determined that the product feature ... is not functional, then the functionality doctrine has no application, and it is irrelevant whether Google's computer program functions better by use of Rosetta Stone's nonfunctional mark."); see also Playboy Enters., Inc. v. Netscape Commc'ns Corp., 354 F.3d 1020, 1030-31 (9th Cir. 2004) (holding that the doctrine of functionality did not help defendants because the court was "not dealing with defendants' wish to trademark their computer program, but with [plaintiffs] ability to protect the trademarks it already uses to identify its products.").[12] The focus of the complaint on the functionality of LKQ's Replacement Grilles is therefore misplaced.

         Having determined that LKQ's complaint fails to sufficiently plead the functionality of the grille features under the first TrafFix test, the court proceeds to consider if LKQ adequately pleaded a competitive necessity for the features under the second TrafFix test.

         2. Competitive necessity

         Regarding the second TrafFix test, FCA argues that LKQ's pleading does not satisfy the competitive necessity test because there is no assertion that vehicles must have automotive grilles fashioned similarly to the FCA Marks to compete in the market for vehicle parts.[13] (D.I. 25 at 3 n.3) According to FCA, LKQ could manufacture Replacement Grilles that fit within the outline of FCA's OEM grilles, while having a different overall design or appearance that does not infringe the FCA Marks. (7/30/19 Tr. at 12:20-13:12) Moreover, FCA contends that consumers' preference for Replacement Grilles matching FCA grilles does not demonstrate a competitive necessity related to a non-reputational disadvantage, as required under Third Circuit precedent. (7/30/19 Tr. at 11:11-12:6)

         In response, LKQ contends that the FCA Marks are protectable in the context of competing OEMs, but they are not protectable against manufacturers of replacement parts because consumer preference and state insurance laws require uniformity. (D.I. 22 at 5) Accordingly, LKQ contends that the relevant market is that of aftermarket sales of replacement grilles for FCA vehicles. (Id. at 4; D.I. 2 at ΒΆ 80) LKQ argues that exclusive use of the FCA Marks by FCA "would put ...


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